A Fighting Chance Is All You Can Ask For

  
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To investors,

The more things change, the more they stay the same. I spend my day talking to entrepreneurs looking to build the next great innovation, investors seeking alpha in some hidden market opportunity, or individuals who are explaining how the world is evolving in a way that no one quite understands yet.

These conversations are fascinating. They give me a view into the future. What technology is being built? How will it change the way that people or organizations conduct their daily activities? What are investors thinking? How will capital flows change? On a day-to-day basis, it can almost be overwhelming. So much innovation, so little time.

But is that really true?

I’ve been spending more time thinking about the long term. Zooming out in a way. Where did we come from? What is happening today? And how does that impact where we are going? These questions don’t have a single right answer, but instead can usually be boiled down to my personal interpretation of the set of facts that I have.

More frequently though, I am concluding that very little has actually changed over the last few decades. Here are a few examples of what I mean:

  • Innovation — this body of work is driven by the activity and movement of intellectual capital. When engineers, entrepreneurs, and innovators begin to all work on the same industry in a given time period, there is incredible progress made. These innovation cycles follow similar paths. You have early adopters and late adopters. Boom and bust cycles. Excitement and disappointment. The easiest way to find innovation is to simply follow the talent.

  • Investment alpha — the best investors are constantly seeking asymmetry. This lopsided risk-reward payoff can be found by believing in technology and innovation trends before the masses. You have to allocate your capital somewhere that others don’t yet believe has value, while also being right. If you do something different and are wrong, that just makes you an idiot. Additionally, following the intellectual talent, particularly young people, can help to easily identify where innovation is happening, and innovation leads to outsized returns.

  • Capital flows — many investors spend too much time trying to outsmart the market, when in reality they simply need to understand the human psychology that drives capital flows. Take inflation as an example. It doesn’t matter if inflation actually occurs or not. If people fear inflation, capital will flow to inflation-hedge assets. If you move your capital before the masses, you will capture a return once the bulk of capital starts to flow. The psychology of markets is still the main driver behind price movements of various assets.

These are just three simple examples that I use to highlight that almost nothing is different this time around. Sure, the technology is different. Some of the players are different. But the core principles of building companies and investing capital have not changed.

An unfortunate story that proves the point is Bill Hwang and Archegos Capital Management. For those that don’t know the story from last week, Bill is a well respected investor who had billions of dollars in assets. Today he has almost nothing left. According to CNBC, here is what happened:

“Archegos held large and leveraged bets in U.S. media stocks ViacomCBS and Discovery, as well as a few Chinese internet ADRs including Baidu, Tencent and Vipshop. Some of the positions were held via total return swaps, a type of derivative that allows investors to take big, levered stakes without disclosing those positions publicly.

These bets started to go south after ViacomCBS’ $3 billion stock offering through Morgan Stanley and JPMorgan earlier in the week fell apart. It triggered a domino effect where prime brokers rushed to exit the positions on Archegos’ behalf and resulted in a massive margin call.”

Bill Hwang lost billions of dollars. Big financial institutions like Nomura and Credit Suisse lost billions of dollars. Frankly, this is the equivalent of financial carnage. So what does this have to do with my point that nothing is different? Even in the good times, lack of risk management and the use of too much leverage can be fatal. This story is as old as time.

As I’ve thought more about the exciting advancements today, it has brought me back to the book that always grounds me in the long-term view of the world: Mark Spitznagel’s The Dao of Capital. Here are just a few of my favorite quotes from the book:

  • “No one should expect that any logical argument or any experience could shake the almost religious fervor of those who believe in salvation through spending and credit expansion.” - Mises

  • "The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence: The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy." - Henry Hazlitt

  • "Underlying Mises' observations throughout was the basic unruliness of market prices, of their inherent subjectivity — a subjectivity that stems from the perceptions, needs, tastes, and impatience of humans." - Spitznagel

  • "Civilizations advance through the accumulation of highly configured capital, which does not thrive amid extreme volatility and destruction; on the contrary, capitalism wants stability — but also the free competitive transferral of resources" - Spitznagel

Free markets and competition lead to innovation. Innovation leads to progress. Progress leads to returns. Returns lead to more investment. The circle of life for financial markets. This is the way. But the more things change, the more they stay the same.

It is easy to get caught up in the day-to-day changes. Zoom out every so often. Remember that we are all playing a game that will last for decades. The goal is not simply to win today, this week, this month, or even this year. The real players know that they have an advantage if they can survive forever.

Long term thinkers have the upper hand. It takes emotional intelligence and control, but if you can keep your focus on the select few things that move the needle for your goals, you have a fighting chance. And ultimately, a fighting chance is all that any of us can ask for.

Have a great day. I’ll talk to everyone tomorrow.

-Pomp


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THE RUNDOWN:

Lagarde Says ECB Could Have Digital Currency Within Four Years: European Central Bank President Christine Lagarde said her institution could launch a digital currency around the middle of this decade if her fellow policy makers give the project the green light this summer. “We need to make sure that we do it right - we owe it to the Europeans,” Lagarde said in a Bloomberg TV interview on Wednesday. “The whole process - let’s be realistic about it -- will in my view take another four years, maybe a little more.” Read more.

NBA Top Shot’s Dapper Labs Raises $305 Million in Latest Round: Dapper Labs, the company behind the popular NBA Top Shot digital collectibles platform, said it closed a $305 million funding round with backing from a roster of professional athletes and media personalities. The latest financing injection -- with endorsements from Michael Jordan, Will Smith, Kevin Durant and Stefon Diggs, among others -- brings the company’s total capital raised since February 2018 to $357 million, according to Roham Gharegozlou, the company’s co-founder and chief executive officer. Read more.

Michael Jordan Joins $305M Investment in Firm Behind NBA Top Shot: Dapper Labs announced a $305 million funding round Tuesday from another batch of National Basketball Association stars and a venture capital firm backing its runaway hit, NBA Top Shot. Kevin Durant, Michael Jordan, the investment firm Coatue and a deep bench of 30 athletes plus the rapper 2 Chainz have piled into the non-fungible token (NFT) firm, the startup said. Citing a person with knowledge of the situation, USA Today reported the funding round places Dapper’s current valuation at $2.6 billion.Read more.

NFL Player Taylor Rapp Is Launching an NFT to Fight Anti-Asian Hate: A young defensive back with the Los Angeles Rams is the latest pro athlete launching a non-fungible token, hoping to use the sale to raise money, and awareness, to combat the wave of anti-Asian hate crimes this year. Taylor Rapp, the free safety entering his third season in the National Football League, completely lacks the star power of a Rob Gronkowski or a Patrick Mahomes, marquee players who leveraged their splashy brands into multimillion-dollar NFT sales earlier this month. Read more.

Bakkt Digital Wallet, for Bitcoin to Starbucks Points, Goes Live After Long Delay: Bakkt is launching its digital wallet app with companies such as Starbucks among its roster of merchant partners. The app drew 500,000 users in its invitation-only trial run prior to its public launch Tuesday, Bakkt said in a press release. The app was announced in October 2019, with plans to launch in the first half of 2020. Read more.


LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE


Anthony Di Iorio is primarily known as a co-founder of Ethereum and an early investor in Bitcoin. Di Iorio is the founder and CEO of the blockchain company Decentral, and the associated Jaxx wallet. He also served as the first chief digital officer of the Toronto Stock Exchange.

In this conversation, Anthony and I discuss:

  • early days of bitcoin

  • co-founding Ethereum

  • how to compound impact

  • Decentral and Jaxx

I really enjoyed this conversation with Anthony. Hopefully you enjoy it too.

LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE


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Nothing in this email is intended to serve as financial advice. Do your own research.